Global Investment Strategy

Five Ways Rising Interest Rates Could Afect Investors Now May Be a Good Time for Investors to Revisit Their Fixed-Income Strategy

Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy

Wells Fargo Investment Institute

Key Takeaways raquo Investors with allocations in cash and cash alternatives

could see returns for risk-free assets slowly move higher

raquo Retirees and fxed-income investors may be able to take less risk to generate income from their portfolios

raquo We expect longer-term interest rates to move modestly higher hence we recommend investors use caution regarding exposure to securities with long-term maturities

raquo Growth should continue in the equity market but we expect increased volatility

raquo Borrowing costs are tied to interest rates and are likely to increase when interest rates rise

Investment and Insurance Products NOT FDIC Insured NO Bank Guarantee MAY Lose Value

Five Ways Rising Interest Rates Could Affect Investors2

Preparing for a Change in Course Investors have become accustomed to low interest rates The Federal Reserve (the Fed) has set short-term rates at very low levels for more than seven years to encourage growth and help the economy recover from the global fnancial crisis In large part the Fedrsquos easy money policies have proven efective as unemployment has dropped to near pre-crisis levels while infation remains subdued As a result of economic improvements the Fed is slowly increasing the federal funds rate

While many investors are focused on the timing of the Fed rate increases it is far more valuable for investors to focus on the path of rate increases During a June 2015 press conference Fed Chairwoman Janet Yellen echoed this view when she said ldquoWhat matters is the entire path of rates and as I have said the committee anticipates economic conditions that would call for a gradual evolution of the fed funds rate toward normalizationrdquo1 Such a gradual evolution of Fed rate policy is exactly what has transpired since her remarks in 2015 and we expect the Fed to continue to gradually increase rates The pace of rate increases will probably be much more gradual than either the 2004-2006 Fed tightening cycle in which rates were increased by 25 basis points2 at each subsequent Federal Open Market Committee (FOMC) meeting or the rapid rate increases experienced in 1994

Even though we anticipate that the interest rate increase cycle will be more modest than seen in the past a rising federal funds rate environment will likely impact many aspects of an investment plan Although some may focus on the negatives associated with a potential increase in interest rates there are also positive aspects investors should consider

1 Source Janet Yellen press conference Washington DC FOMC meeting June 17 2015 2 100 basis points = 1

Five Ways Rising Interest Rates Could Affect Investors 3

1 Investors Should Get a Boost in Returns Since the fnancial recession many investors have chosen to hold an outsized allocation to cash and cash alternatives Some investors have been concerned about locking in historically low interest rates in fxed-income investments while others are looking to avoid market risk and volatility or simply to store more away for a rainy day

Given the slow pace of expected rate increases investors in cash alternatives should not expect returns that will ofset infation in the near term We continue to encourage investors to examine their cash alternatives holdings and where appropriate systematically invest those excess allocations in the market Investors should hold modest amounts of cash alternatives to meet near-term liquidity needs and emergency expenses Unfortunately the amount of cash alternatives held in many accounts today exceeds long-term averages and these requirements

It is not just cash alternative allocations that may experience an increase in income other fxed-income investors might also experience higher income potential over time This is especially true for investors who will experience maturing fxed-income positions Many bonds bought over the last several years ofered investors very low income-earning potential as those bonds mature and the proceeds are reinvested a higher-interest-rate environment could ofer investors the opportunity to increase the income their fxed-income portfolio produces

For Investors an Increase in Interest Rates Might Be a Welcome Development Fed funds rate 2005-2016

6

5

4

3

2

1

0 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo15 lsquo16

While infation has remained low the impact on the purchasing power of an asset that is earning little is meaningful as the infation impact compounds over time Further many investors waiting in cash alternatives have missed out on strong performance in many other investment sectors As the Fed raises interest rates investors should fnally begin to see the returns of risk-free assets move higher albeit slowly

Source Wells Fargo Investment Institute as of November 28 2016

2 Income Investors May Be Able to Take Less Risk

For many investors the low-rate environment has caused them to take greater risks in an efort to generate income from their portfolios Historically before the global fnancial recession income investors could buy FDIC-insured certifcates of deposit (CDs) that earned returns above 5 Today due to the Fedrsquos easy monetary policies traditional lower-risk income-generating investments ofer little in the way of income

Income strategies in the marketplace have emerged to help meet investorsrsquo income objectives The ability to achieve a yield in excess of short-term Treasury yields does not come without risk regardless of the strategies employed Many income solutions employed in todayrsquos market incorporate strategies such as

raquo Extending exposure to longer maturity bonds

raquo Moving lower in credit qualitymdashoften to below investment-grade levels

raquo Employing leverage

raquo Using fnancial derivatives

Many of these strategies have performed well in recent years As the Fed slowly raises interest rates however strategies that have proven efective in the past may face challenges as investors have the ability to reduce risk while still meeting portfolio income requirements Furthermore many of the most popular income-producing strategies have not been stressed during a signifcant credit shock or a sustained increase in interest rates

Price shocks in the fxed-income space could potentially be more signifcant and volatile in the future given the reduction of fxed-income liquidity in the market due to consolidation and regulatory reforms The changing fxed-income market makes it difcult for investors to fully appreciate the potential risks inherent in the search for yield With the Fed intent on moving slowly it may take time before investors once again fnd they need to take less risk to help achieve their income goals

Addressing retireesrsquo unique income needs Generating income is particularly important to those in retirement If you are retired we suggest you

raquo Focus on diversifcation of your income sources If your portfolio contains an over-allocation to fxed-income investments with longer maturitiesdurations that yoursquove purchased in recent years in an efort to enhance yield you may want to think about reallocating your portfolio

raquo Reassess your asset allocation As your investment needs and fnancial goals change your investments and risk tolerance will likely change as well A regular asset allocation review is important to help keep your investments aligned with your fnancial goals

4

raquo Avoid chasing or becoming overly preoccupied with yield Be careful to maintain a total-return (price appreciation plus dividend or interest income) perspective because when investing over a long retirement you will likely need both income and growth to fund future income needs and combat infation

raquo Keep a close eye on your income needs and related liquidity During a rising rate environment bonds and other fxed income securities are exposed to interest rate risk and a loss of principal Since bond prices typically fall when rates rise fxed income returns can be negatively afected The risk of incurring principal loss during a rising-rate environment can be compounded if an investor has a corresponding need to liquidate certain holdings during this period However the risk to potential principal loss can be managed if spending habits are carefully matched and adapted with income fows Also during a rising rate environment investors may be forced to liquidate certain of their fxed income holdings Such a situation may be avoided by having sufcient cash reserves or other assets and available credit to access

In Search of Income We believe investors focusing on an income strategy in a rising-interest-rate environment should do so with a measured well-diversifed allocation Shown below are a variety of investments that can provide higher income potential

Traditionally higher-income-potential sectors

Within fxed-income Outside fxed income bull High-yield debt bull Real estate investment trusts (REITs) bull Bank loans bull Master limited partnerships (MLPs) bull Emerging-market debt bull Business development companies (BDCs) bull Preferred securities bull Equities paying higher dividends

A portfolio focused only on yield may leave an investor exposed to numerous other risks that a more diversified asset allocation should help mitigate These risks could be highlighted in an environment in which the federal funds rate is increasing after being held near low levels for an extended period Investors should understand the added risks inherent in this type of strategy and make sure the risks are appropriate for their overall risk tolerance objective

Risks of investing with a focus on yield

Lack of diversifcation A proper asset allocation balancing risk and return can provide stability during events that create distress in global markets

Lack of liquidity Liquidity can be valuable for short-term needs and investment opportunities

Susceptibility to inflation

Corrosive long-term effect distracts from ability to build long-term wealth

Higher volatility

Highly correlated assets generally donrsquot provide the benefits of asset allocation during periods of stress

Lack of exposure to growth

An income-only portfolio may underperform during better economic environments

Asset allocation does not guarantee a profit or protect against loss

5

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

Five Ways Rising Interest Rates Could Affect Investors2

Preparing for a Change in Course Investors have become accustomed to low interest rates The Federal Reserve (the Fed) has set short-term rates at very low levels for more than seven years to encourage growth and help the economy recover from the global fnancial crisis In large part the Fedrsquos easy money policies have proven efective as unemployment has dropped to near pre-crisis levels while infation remains subdued As a result of economic improvements the Fed is slowly increasing the federal funds rate

While many investors are focused on the timing of the Fed rate increases it is far more valuable for investors to focus on the path of rate increases During a June 2015 press conference Fed Chairwoman Janet Yellen echoed this view when she said ldquoWhat matters is the entire path of rates and as I have said the committee anticipates economic conditions that would call for a gradual evolution of the fed funds rate toward normalizationrdquo1 Such a gradual evolution of Fed rate policy is exactly what has transpired since her remarks in 2015 and we expect the Fed to continue to gradually increase rates The pace of rate increases will probably be much more gradual than either the 2004-2006 Fed tightening cycle in which rates were increased by 25 basis points2 at each subsequent Federal Open Market Committee (FOMC) meeting or the rapid rate increases experienced in 1994

Even though we anticipate that the interest rate increase cycle will be more modest than seen in the past a rising federal funds rate environment will likely impact many aspects of an investment plan Although some may focus on the negatives associated with a potential increase in interest rates there are also positive aspects investors should consider

1 Source Janet Yellen press conference Washington DC FOMC meeting June 17 2015 2 100 basis points = 1

Five Ways Rising Interest Rates Could Affect Investors 3

1 Investors Should Get a Boost in Returns Since the fnancial recession many investors have chosen to hold an outsized allocation to cash and cash alternatives Some investors have been concerned about locking in historically low interest rates in fxed-income investments while others are looking to avoid market risk and volatility or simply to store more away for a rainy day

Given the slow pace of expected rate increases investors in cash alternatives should not expect returns that will ofset infation in the near term We continue to encourage investors to examine their cash alternatives holdings and where appropriate systematically invest those excess allocations in the market Investors should hold modest amounts of cash alternatives to meet near-term liquidity needs and emergency expenses Unfortunately the amount of cash alternatives held in many accounts today exceeds long-term averages and these requirements

It is not just cash alternative allocations that may experience an increase in income other fxed-income investors might also experience higher income potential over time This is especially true for investors who will experience maturing fxed-income positions Many bonds bought over the last several years ofered investors very low income-earning potential as those bonds mature and the proceeds are reinvested a higher-interest-rate environment could ofer investors the opportunity to increase the income their fxed-income portfolio produces

For Investors an Increase in Interest Rates Might Be a Welcome Development Fed funds rate 2005-2016

6

5

4

3

2

1

0 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo15 lsquo16

While infation has remained low the impact on the purchasing power of an asset that is earning little is meaningful as the infation impact compounds over time Further many investors waiting in cash alternatives have missed out on strong performance in many other investment sectors As the Fed raises interest rates investors should fnally begin to see the returns of risk-free assets move higher albeit slowly

Source Wells Fargo Investment Institute as of November 28 2016

2 Income Investors May Be Able to Take Less Risk

For many investors the low-rate environment has caused them to take greater risks in an efort to generate income from their portfolios Historically before the global fnancial recession income investors could buy FDIC-insured certifcates of deposit (CDs) that earned returns above 5 Today due to the Fedrsquos easy monetary policies traditional lower-risk income-generating investments ofer little in the way of income

Income strategies in the marketplace have emerged to help meet investorsrsquo income objectives The ability to achieve a yield in excess of short-term Treasury yields does not come without risk regardless of the strategies employed Many income solutions employed in todayrsquos market incorporate strategies such as

raquo Extending exposure to longer maturity bonds

raquo Moving lower in credit qualitymdashoften to below investment-grade levels

raquo Employing leverage

raquo Using fnancial derivatives

Many of these strategies have performed well in recent years As the Fed slowly raises interest rates however strategies that have proven efective in the past may face challenges as investors have the ability to reduce risk while still meeting portfolio income requirements Furthermore many of the most popular income-producing strategies have not been stressed during a signifcant credit shock or a sustained increase in interest rates

Price shocks in the fxed-income space could potentially be more signifcant and volatile in the future given the reduction of fxed-income liquidity in the market due to consolidation and regulatory reforms The changing fxed-income market makes it difcult for investors to fully appreciate the potential risks inherent in the search for yield With the Fed intent on moving slowly it may take time before investors once again fnd they need to take less risk to help achieve their income goals

Addressing retireesrsquo unique income needs Generating income is particularly important to those in retirement If you are retired we suggest you

raquo Focus on diversifcation of your income sources If your portfolio contains an over-allocation to fxed-income investments with longer maturitiesdurations that yoursquove purchased in recent years in an efort to enhance yield you may want to think about reallocating your portfolio

raquo Reassess your asset allocation As your investment needs and fnancial goals change your investments and risk tolerance will likely change as well A regular asset allocation review is important to help keep your investments aligned with your fnancial goals

4

raquo Avoid chasing or becoming overly preoccupied with yield Be careful to maintain a total-return (price appreciation plus dividend or interest income) perspective because when investing over a long retirement you will likely need both income and growth to fund future income needs and combat infation

raquo Keep a close eye on your income needs and related liquidity During a rising rate environment bonds and other fxed income securities are exposed to interest rate risk and a loss of principal Since bond prices typically fall when rates rise fxed income returns can be negatively afected The risk of incurring principal loss during a rising-rate environment can be compounded if an investor has a corresponding need to liquidate certain holdings during this period However the risk to potential principal loss can be managed if spending habits are carefully matched and adapted with income fows Also during a rising rate environment investors may be forced to liquidate certain of their fxed income holdings Such a situation may be avoided by having sufcient cash reserves or other assets and available credit to access

In Search of Income We believe investors focusing on an income strategy in a rising-interest-rate environment should do so with a measured well-diversifed allocation Shown below are a variety of investments that can provide higher income potential

Traditionally higher-income-potential sectors

Within fxed-income Outside fxed income bull High-yield debt bull Real estate investment trusts (REITs) bull Bank loans bull Master limited partnerships (MLPs) bull Emerging-market debt bull Business development companies (BDCs) bull Preferred securities bull Equities paying higher dividends

A portfolio focused only on yield may leave an investor exposed to numerous other risks that a more diversified asset allocation should help mitigate These risks could be highlighted in an environment in which the federal funds rate is increasing after being held near low levels for an extended period Investors should understand the added risks inherent in this type of strategy and make sure the risks are appropriate for their overall risk tolerance objective

Risks of investing with a focus on yield

Lack of diversifcation A proper asset allocation balancing risk and return can provide stability during events that create distress in global markets

Lack of liquidity Liquidity can be valuable for short-term needs and investment opportunities

Susceptibility to inflation

Corrosive long-term effect distracts from ability to build long-term wealth

Higher volatility

Highly correlated assets generally donrsquot provide the benefits of asset allocation during periods of stress

Lack of exposure to growth

An income-only portfolio may underperform during better economic environments

Asset allocation does not guarantee a profit or protect against loss

5

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

Five Ways Rising Interest Rates Could Affect Investors 3

1 Investors Should Get a Boost in Returns Since the fnancial recession many investors have chosen to hold an outsized allocation to cash and cash alternatives Some investors have been concerned about locking in historically low interest rates in fxed-income investments while others are looking to avoid market risk and volatility or simply to store more away for a rainy day

Given the slow pace of expected rate increases investors in cash alternatives should not expect returns that will ofset infation in the near term We continue to encourage investors to examine their cash alternatives holdings and where appropriate systematically invest those excess allocations in the market Investors should hold modest amounts of cash alternatives to meet near-term liquidity needs and emergency expenses Unfortunately the amount of cash alternatives held in many accounts today exceeds long-term averages and these requirements

It is not just cash alternative allocations that may experience an increase in income other fxed-income investors might also experience higher income potential over time This is especially true for investors who will experience maturing fxed-income positions Many bonds bought over the last several years ofered investors very low income-earning potential as those bonds mature and the proceeds are reinvested a higher-interest-rate environment could ofer investors the opportunity to increase the income their fxed-income portfolio produces

For Investors an Increase in Interest Rates Might Be a Welcome Development Fed funds rate 2005-2016

6

5

4

3

2

1

0 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo15 lsquo16

While infation has remained low the impact on the purchasing power of an asset that is earning little is meaningful as the infation impact compounds over time Further many investors waiting in cash alternatives have missed out on strong performance in many other investment sectors As the Fed raises interest rates investors should fnally begin to see the returns of risk-free assets move higher albeit slowly

Source Wells Fargo Investment Institute as of November 28 2016

2 Income Investors May Be Able to Take Less Risk

For many investors the low-rate environment has caused them to take greater risks in an efort to generate income from their portfolios Historically before the global fnancial recession income investors could buy FDIC-insured certifcates of deposit (CDs) that earned returns above 5 Today due to the Fedrsquos easy monetary policies traditional lower-risk income-generating investments ofer little in the way of income

Income strategies in the marketplace have emerged to help meet investorsrsquo income objectives The ability to achieve a yield in excess of short-term Treasury yields does not come without risk regardless of the strategies employed Many income solutions employed in todayrsquos market incorporate strategies such as

raquo Extending exposure to longer maturity bonds

raquo Moving lower in credit qualitymdashoften to below investment-grade levels

raquo Employing leverage

raquo Using fnancial derivatives

Many of these strategies have performed well in recent years As the Fed slowly raises interest rates however strategies that have proven efective in the past may face challenges as investors have the ability to reduce risk while still meeting portfolio income requirements Furthermore many of the most popular income-producing strategies have not been stressed during a signifcant credit shock or a sustained increase in interest rates

Price shocks in the fxed-income space could potentially be more signifcant and volatile in the future given the reduction of fxed-income liquidity in the market due to consolidation and regulatory reforms The changing fxed-income market makes it difcult for investors to fully appreciate the potential risks inherent in the search for yield With the Fed intent on moving slowly it may take time before investors once again fnd they need to take less risk to help achieve their income goals

Addressing retireesrsquo unique income needs Generating income is particularly important to those in retirement If you are retired we suggest you

raquo Focus on diversifcation of your income sources If your portfolio contains an over-allocation to fxed-income investments with longer maturitiesdurations that yoursquove purchased in recent years in an efort to enhance yield you may want to think about reallocating your portfolio

raquo Reassess your asset allocation As your investment needs and fnancial goals change your investments and risk tolerance will likely change as well A regular asset allocation review is important to help keep your investments aligned with your fnancial goals

4

raquo Avoid chasing or becoming overly preoccupied with yield Be careful to maintain a total-return (price appreciation plus dividend or interest income) perspective because when investing over a long retirement you will likely need both income and growth to fund future income needs and combat infation

raquo Keep a close eye on your income needs and related liquidity During a rising rate environment bonds and other fxed income securities are exposed to interest rate risk and a loss of principal Since bond prices typically fall when rates rise fxed income returns can be negatively afected The risk of incurring principal loss during a rising-rate environment can be compounded if an investor has a corresponding need to liquidate certain holdings during this period However the risk to potential principal loss can be managed if spending habits are carefully matched and adapted with income fows Also during a rising rate environment investors may be forced to liquidate certain of their fxed income holdings Such a situation may be avoided by having sufcient cash reserves or other assets and available credit to access

In Search of Income We believe investors focusing on an income strategy in a rising-interest-rate environment should do so with a measured well-diversifed allocation Shown below are a variety of investments that can provide higher income potential

Traditionally higher-income-potential sectors

Within fxed-income Outside fxed income bull High-yield debt bull Real estate investment trusts (REITs) bull Bank loans bull Master limited partnerships (MLPs) bull Emerging-market debt bull Business development companies (BDCs) bull Preferred securities bull Equities paying higher dividends

A portfolio focused only on yield may leave an investor exposed to numerous other risks that a more diversified asset allocation should help mitigate These risks could be highlighted in an environment in which the federal funds rate is increasing after being held near low levels for an extended period Investors should understand the added risks inherent in this type of strategy and make sure the risks are appropriate for their overall risk tolerance objective

Risks of investing with a focus on yield

Lack of diversifcation A proper asset allocation balancing risk and return can provide stability during events that create distress in global markets

Lack of liquidity Liquidity can be valuable for short-term needs and investment opportunities

Susceptibility to inflation

Corrosive long-term effect distracts from ability to build long-term wealth

Higher volatility

Highly correlated assets generally donrsquot provide the benefits of asset allocation during periods of stress

Lack of exposure to growth

An income-only portfolio may underperform during better economic environments

Asset allocation does not guarantee a profit or protect against loss

5

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

2 Income Investors May Be Able to Take Less Risk

For many investors the low-rate environment has caused them to take greater risks in an efort to generate income from their portfolios Historically before the global fnancial recession income investors could buy FDIC-insured certifcates of deposit (CDs) that earned returns above 5 Today due to the Fedrsquos easy monetary policies traditional lower-risk income-generating investments ofer little in the way of income

Income strategies in the marketplace have emerged to help meet investorsrsquo income objectives The ability to achieve a yield in excess of short-term Treasury yields does not come without risk regardless of the strategies employed Many income solutions employed in todayrsquos market incorporate strategies such as

raquo Extending exposure to longer maturity bonds

raquo Moving lower in credit qualitymdashoften to below investment-grade levels

raquo Employing leverage

raquo Using fnancial derivatives

Many of these strategies have performed well in recent years As the Fed slowly raises interest rates however strategies that have proven efective in the past may face challenges as investors have the ability to reduce risk while still meeting portfolio income requirements Furthermore many of the most popular income-producing strategies have not been stressed during a signifcant credit shock or a sustained increase in interest rates

Price shocks in the fxed-income space could potentially be more signifcant and volatile in the future given the reduction of fxed-income liquidity in the market due to consolidation and regulatory reforms The changing fxed-income market makes it difcult for investors to fully appreciate the potential risks inherent in the search for yield With the Fed intent on moving slowly it may take time before investors once again fnd they need to take less risk to help achieve their income goals

Addressing retireesrsquo unique income needs Generating income is particularly important to those in retirement If you are retired we suggest you

raquo Focus on diversifcation of your income sources If your portfolio contains an over-allocation to fxed-income investments with longer maturitiesdurations that yoursquove purchased in recent years in an efort to enhance yield you may want to think about reallocating your portfolio

raquo Reassess your asset allocation As your investment needs and fnancial goals change your investments and risk tolerance will likely change as well A regular asset allocation review is important to help keep your investments aligned with your fnancial goals

4

raquo Avoid chasing or becoming overly preoccupied with yield Be careful to maintain a total-return (price appreciation plus dividend or interest income) perspective because when investing over a long retirement you will likely need both income and growth to fund future income needs and combat infation

raquo Keep a close eye on your income needs and related liquidity During a rising rate environment bonds and other fxed income securities are exposed to interest rate risk and a loss of principal Since bond prices typically fall when rates rise fxed income returns can be negatively afected The risk of incurring principal loss during a rising-rate environment can be compounded if an investor has a corresponding need to liquidate certain holdings during this period However the risk to potential principal loss can be managed if spending habits are carefully matched and adapted with income fows Also during a rising rate environment investors may be forced to liquidate certain of their fxed income holdings Such a situation may be avoided by having sufcient cash reserves or other assets and available credit to access

In Search of Income We believe investors focusing on an income strategy in a rising-interest-rate environment should do so with a measured well-diversifed allocation Shown below are a variety of investments that can provide higher income potential

Traditionally higher-income-potential sectors

Within fxed-income Outside fxed income bull High-yield debt bull Real estate investment trusts (REITs) bull Bank loans bull Master limited partnerships (MLPs) bull Emerging-market debt bull Business development companies (BDCs) bull Preferred securities bull Equities paying higher dividends

A portfolio focused only on yield may leave an investor exposed to numerous other risks that a more diversified asset allocation should help mitigate These risks could be highlighted in an environment in which the federal funds rate is increasing after being held near low levels for an extended period Investors should understand the added risks inherent in this type of strategy and make sure the risks are appropriate for their overall risk tolerance objective

Risks of investing with a focus on yield

Lack of diversifcation A proper asset allocation balancing risk and return can provide stability during events that create distress in global markets

Lack of liquidity Liquidity can be valuable for short-term needs and investment opportunities

Susceptibility to inflation

Corrosive long-term effect distracts from ability to build long-term wealth

Higher volatility

Highly correlated assets generally donrsquot provide the benefits of asset allocation during periods of stress

Lack of exposure to growth

An income-only portfolio may underperform during better economic environments

Asset allocation does not guarantee a profit or protect against loss

5

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

raquo Avoid chasing or becoming overly preoccupied with yield Be careful to maintain a total-return (price appreciation plus dividend or interest income) perspective because when investing over a long retirement you will likely need both income and growth to fund future income needs and combat infation

raquo Keep a close eye on your income needs and related liquidity During a rising rate environment bonds and other fxed income securities are exposed to interest rate risk and a loss of principal Since bond prices typically fall when rates rise fxed income returns can be negatively afected The risk of incurring principal loss during a rising-rate environment can be compounded if an investor has a corresponding need to liquidate certain holdings during this period However the risk to potential principal loss can be managed if spending habits are carefully matched and adapted with income fows Also during a rising rate environment investors may be forced to liquidate certain of their fxed income holdings Such a situation may be avoided by having sufcient cash reserves or other assets and available credit to access

In Search of Income We believe investors focusing on an income strategy in a rising-interest-rate environment should do so with a measured well-diversifed allocation Shown below are a variety of investments that can provide higher income potential

Traditionally higher-income-potential sectors

Within fxed-income Outside fxed income bull High-yield debt bull Real estate investment trusts (REITs) bull Bank loans bull Master limited partnerships (MLPs) bull Emerging-market debt bull Business development companies (BDCs) bull Preferred securities bull Equities paying higher dividends

A portfolio focused only on yield may leave an investor exposed to numerous other risks that a more diversified asset allocation should help mitigate These risks could be highlighted in an environment in which the federal funds rate is increasing after being held near low levels for an extended period Investors should understand the added risks inherent in this type of strategy and make sure the risks are appropriate for their overall risk tolerance objective

Risks of investing with a focus on yield

Lack of diversifcation A proper asset allocation balancing risk and return can provide stability during events that create distress in global markets

Lack of liquidity Liquidity can be valuable for short-term needs and investment opportunities

Susceptibility to inflation

Corrosive long-term effect distracts from ability to build long-term wealth

Higher volatility

Highly correlated assets generally donrsquot provide the benefits of asset allocation during periods of stress

Lack of exposure to growth

An income-only portfolio may underperform during better economic environments

Asset allocation does not guarantee a profit or protect against loss

5

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

3 Longer-Term Securities Require Caution As the Fed slowly increases the federal funds rate investors should expect that yields in shorter term maturities will likely move higher We also expect longer-term rates to move higher but in a measured and contained manner Some investors may assume that since we expect larger interest rate moves in short maturities relative to long maturities that we also expect larger price movements in short-term maturity bond positions This assumption is incorrect

Even if short-term rates should move signifcantly higher the price impact on short-term securities would be relatively minimal given the limited time to maturity For example an investor in two-year Treasury securities would experience just a 130 negative total return should short-term rates increase 2 over the course of 12 months

Longer-term bonds are much more sensitive to even modest changes in longer-term interest rates This sensitivity to interest rates can be expressed through a bondrsquos duration Duration is one measure of the sensitivity of a bondrsquos price to a change in interest rate movements Investors can use the duration calculation to approximate the percentage change in a bondrsquos price for an instantaneous one percent parallel shift in the yield curve all else being equal For example the price of a bond with a duration of fve years would be expected to rise or fall 5 in price for every one percent change in market interest rates The longer (higher) the duration the more prices will fuctuate as interest rates rise and fall The duration of a fxed-income instrument is generally shorter than the maturity because it takes into account the interest over time

In the table below a hypothetical 10-year note with a 225 yield has an 891 year duration If interest rates move from 25 to 35 we would expect the notersquos price to drop from $1000 to $920 If the note continued to be held to maturity the $1000 face value would be returned at maturity but during the time below market interest rate would have been earned below-market interest rate during that time

Duration Tends to Increase With Term

Yield Duration Par value +11 +21 +31

300 1968 100 83 69 5830-year bond 225 891 100 92 84 7710-year note 150 480 100 95 91 875-year note 075 198 100 98 96 942-year note

Table is for illustrative purposes only Does not represent any specifc investment Source Wells Fargo Investment Institute

1 Value in table is bondrsquos estimated price assuming an instantaneous parallel shift of the interest-rate curve by the amount shown

6

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

Remain Diligent Regarding Exposure to Long-Term Maturities Since interest rates may increase should investors sell their bonds After all as interest rates increase bond prices tend to fall With the potential of negative price returns investors in search of better opportunities may be considering signifcantly reducing or eliminating their fxed-income allocations There are several factors to consider before making such a move

First we strongly recommend investors consider the total-return picture as the most accurate judge of fxed-income performance Investors who neglect yields and consider only price movement are missing half the picture Second we expect a well-diversifed fxed-income portfolio will continue to outperform cash alternative allocations over the next several years So moving from fxed income into cash alternatives would not appear to be the optimal long-term decision Third consider the following three reasons fxed-income positions are included in most asset allocation models

Diversifcation The future is uncertain While we may have a strong feeling of what tomorrow will look like unforeseeable events often alter outcomes Taking too large a bet on any one particular outcome can increase risk signifcantly Investment strategies based on concentrated allocations usually come with higher-risk

Reduced volatility One of the primary reasons to continue to own fxed-income investments even if interest rates increase is the lower volatility these investments typically ofer when compared to stocks Bonds when used properly as part of a diversifed investment strategy may help smooth out a portfoliorsquos overall performance

Liquidity Most bonds have a maturity date when if the issuer has not defaulted principal is returned to the investor If future cash needs are not able to be anticipated purchasing high-quality bonds with maturities near those occasions can be an efective way to stay invested in the markets while maintaining some assurance funds will be available when needed

7

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

4 Equity Growth Should Continue But

With More Volatility With the Fed poised to increase the federal funds rate many investors are concerned that the implications for the equity market are negative After all the equity market has been performing quite well and has become accustomed to an environment of near-zero short-term interest rates While there is signifcant angst surrounding Fed tightening investors should keep in mind tightening is the Fedrsquos way of saying it thinks the economy is on a better footing We believe the current equity bull market is likely to continue even as the Fed raises rates Investors should however be prepared for an increase in fnancial asset volatility in both equity and fxed income

In general the Fed looks to make rate increases early enough that it will not be necessary to rapidly increase rates at a destabilizing pace Ideally increases take place only as the Fed believes the economy is capable of moving ahead under its own momentum at the higher interest rate levels It appears that as the Fed tightens it will do so at a modest pace monitoring the global fundamentals along the way

The graph on page 9 reviews US equity market performance during the last two Fed interest-rate-tightening cycles We have plotted 36 months of forward 12-month changes in the SampP 500 Index beginning with the initial fed funds rate increase The blue bars represent the forward 12-month SampP 500 Index changes for the tightening cycle that started in February 1994 the green bars depict the forward-looking market changes for the tightening cycle starting in June 2004

Of course this specifc analysis on its own does not take into consideration market valuation diferentials between the last two cycles and the current one Yet the SampP 500 Indexrsquos priceearnings (PE) is currently slightly above the 30-year median on a trailing 12-month basis (173x currently versus a 167x median) That PE valuation is based on our calendar 2017 earnings estimate

Taking infation and the level of interest rates into account stocks continue to appear more attractive than bonds and cash alternatives Investors should consider rebalancing their portfolios with a lean mostly toward the economyrsquos cyclical segments Our favored equity sectors include the Consumer Discretionary Information Technology Industrial segments Financials and Health Care We currently recommend investors underweight the Utility Energy and Consumer Staples sectors

8

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

Forw

ard 1

2-M

onth

Perce

nt C

hang

e Samp

P 500

Inde

x

60

50

40

30

20

10

0

-10

-20 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Period beginning February 1994

Period beginning June 2004

Months From First Rate Increase

Stocks Have Continued to Perform Well Amid Rising Interest Rates Forward 12-month percentage change SampP 500 Index

Source Wells Fargo Investment Institute as of November 30 2016

Although each economic and market cycle has its own personality and idiosyncrasies note that forward-looking SampP 500 Index changes during the two prior cycles were persistently positive well beyond the start of the tightening stages Although volatility can rise early in tightening phases improving fundamentals continued to support the stock market during the last portions of these cycles Past performance is no guarantee of future results

9

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

5 Borrowing Costs Likely to Increase Investors would be remiss to concentrate only on their investments when considering the impact of Fed rate hikes Borrowing costs are also tied to interest rates and tend to increase when the Fed increases interest rates

The most immediate impact of increases in the federal funds rate will be on loans tied to short-term or foating rate debt For individuals who have borrowed in the short-term market or have longer-term debt with payments that adjust based on the rate of an underlying reference rate or benchmark (LIBOR or Prime Rates for example) a Fed rate increase will likely lead to an increase in debt payments This could be an unwelcome surprise for individuals who have become accustom to a zero-interest-rate environment For investors with short-term or foating rate debt now is the time to analyze your balance sheet to determine whether your current liability structure is appropriate

Given that short-term rate increases are often associated with an improving economy many investors often feel comfortable increasing their borrowing and taking on additional debt during the economic cyclersquos current period Investors need to take care to maintain a liquid asset base that can cover borrowingrsquos costs during less prosperous times

Higher interest rates are also likely to have an impact on the housing market As the chart on page 11 shows fxed-rate mortgages closely track longer-term interest rates such as 10-year Treasuries Homeowners who have a fxed-rate mortgage will not see their payments increase for the life of the loan but should a change of residence become necessary the cost of borrowing for a new residence could increase signifcantly

This anticipated increase in mortgage rates could temper activity and slow price momentum in the housing market Initially we expect the impact of an improving economy to outweigh the increase in borrowing costs for home purchasers The slow pace of anticipated Fed rate increases should help keep the housing market supported in the near term

10

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

Expect Mortgage Rates to Increase 30-year mortgage rates versus 10-year Treasuries

lsquo00 0

1

2

3

4

5

6

7

8

9

lsquo01 lsquo02 lsquo03 lsquo04 lsquo05 lsquo06 lsquo07 lsquo08 lsquo09 lsquo10 lsquo11 lsquo12 lsquo13 lsquo14 lsquo16lsquo15

Inte

rest

Rate

s 30-year fixed mortgage

10-year Treasury yield

Source Wells Fargo Investment Institute as of November 25 2016 Past performance is not indicative of future performance

As the Fed raises rates we expect to see mortgage rates which tend to track longer-term interest rates increase Over the last fve years 30-year fxed-rate mortgages have spent a signifcant time period at or below the 4 interest-rate level While we are not anticipating a dramatic increase in longer-term rates itrsquos likely fxed-rate mortgage interest rates will increase slowly over time as the economy improves and the Fed normalizes rates

About the Author Brian Rehling CFAreg Co-Head of Global Fixed Income Strategy Wells Fargo Investment Institute

Mr Rehling focuses on global fxed-income asset allocation strategy guidance and the interest rate outlook Mr Rehling is frequently quoted in national media outlets including The Wall Street Journal The New York Times Barronrsquos Bloomberg News Fox Business CNBC CNN Money and MarketWatch

Mr Rehling has extensive investment strategy experience and has spent more than 15 years in leadership roles at Wells Fargo Advisors predecessor frm AG Edwards working with retail high-net-worth ultra-high-net-worth and institutional clients He earned a Bachelor of Science in Business Administration with a focus in Finance from the University of Missouri and is a CFAreg charterholder Mr Rehling is based in St Louis

11

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17

All investing involves risk including the possible loss of principal Diferent investments ofer diferent levels of potential return and market risk Some of the risks associated with the products mentioned in this report include

Fixed-Income Sector Risks

Fixed income Investments in fxed-income securities are subject to interest rate and credit risks Bond prices fuctuate inversely to changes in interest rates Therefore a general rise in interest rates can result in the decline in a bondrsquos price Credit risk is the risk that an issuer will default on payments of interest and principal This risk is higher when investing in high-yield bonds also known as junk bonds which have lower ratings and are subject to greater volatility If sold prior to maturity fxed-income securities are subject to market risk All fxed-income investments may be worth less than their original cost upon redemption or maturity

Bank loans Bank loans have speculative characteristics and are subject to the risk of non-payment of principal and interest They generally invest in companies that are below investment grade Exposure to such companies involves additional credit risk than many other investments Other risks include insolvency collateral impairment illiquidity and the risk of bankruptcy Bank loans are also subject to economic risk In the event of a recession the bank loan sector may sufer increased defaults which would drive down the value of existing bank loans

Emerging-market debt Investing in foreign securities presents certain risks not associated with domestic investments such as currency fuctuation political and economic instability and diferent accounting standards This may result in greater share price volatility These risks are heightened in emerging markets The stability of the issuing government is an important factor to consider when assessing the risk of investing in emerging-market debt

Preferred securities There are special risks associated with investing in preferred securities Preferred securities are subject to interest rate and credit risks Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates Credit risk is the risk that an issuer will default on payments of interest and principal Preferred securities are generally subordinated to bonds or other debt instruments in an issuerrsquos capital structure subjecting them to a greater risk of non-payment than more senior securities In addition the issue may be callable which may negatively impact the return of the security Preferred dividends are not guaranteed and are subject to deferral or elimination

Sector Risks Outside of Fixed Income

Real estate There are special risks associated with an investment in real estate including the possible illiquidity of the underlying properties credit risk interest rate fuctuations and the impact of varied economic conditions

Master limited partnerships (MLPs) Investment in MLPs involves certain risks which difer from an investment in the securities of a corporation MLPs may be sensitive to price changes in oil natural gas etc regulatory risk and rising interest rates A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash fows distributed by the MLP Other risks include the volatility associated with the use of leverage volatility of the commodities markets market risks supply and demand natural and man-made catastrophes competition liquidity market price discount from net asset value (NAV) and other material risks

Business development company (BDC) A BDC is a type of domestic closed-end investment company that is operated for the purpose of making investments in small and developing businesses and fnancially troubled businesses Investing in a BDC involves economic credit and liquidity risks in addition to the special risks associated with investing in a portfolio of small and developing or fnancially troubled businesses BDCs are exposed to leverage risk The use of leverage in an investment portfolio can magnify any price movements resulting in high volatility and potentially signifcant loss of principal

Wells Fargo Investment Institute Inc (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo amp Company and provides investment advice to Wells Fargo Bank NA Wells Fargo Advisors and other Wells Fargo afliates Wells Fargo Bank NA is a bank afliate of Wells Fargo amp Company

The information in this report was prepared by the Global Investment Strategy (GIS) division of WFII Opinions represent GISrsquo opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security market sector or the markets generally GIS does not undertake to advise you of any change in its opinions or the information contained in this report Wells Fargo amp Company afliates may issue reports or have opinions that are inconsistent with and reach diferent conclusions from this report

Carefully consider a fundrsquos investment objectives risks charges and expenses before investing For a current prospectus and if available a summary prospectus containing this and other information visit wellsfargofundscom Read it carefully before investing Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo amp Company Wells Fargo Funds Management LLC a wholly owned subsidiary of Wells Fargo amp Company provides investment advisory and administrative services for Wells Fargo Funds Other affiliates of Wells Fargo amp Company provide subadvisory and other services for the funds The funds are distributed by Wells Fargo Funds Distributor LLC Member FINRA an affiliate of Wells Fargo amp Company Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accountsassets and neither provides investment advicerecommendations or acts as an investment advice fiduciary to any investor 304237 06-17 FAWP070 06-17